Zero-based Budgeting Is Surging

More companies are biting the bullet and going through the painful process of realigning their culture to support a transformation to ZBB.
David McCannMarch 7, 2018
Zero-based Budgeting Is Surging

Zero-based budgeting, where an organization formulates a budget from scratch each year instead of basing it on what happened the previous year, has been around as a concept since the 1970s. However, adoption of the methodology was quite limited until the past few years, according to new research by Accenture Strategy.

“Anything ‘zero-based’ is all the rage today,” write the report’s authors, Accenture’s Kris Timmermans and Rodrigo Abdalla. The business media, they point out, is flooded with stories of companies using zero-based methods to reduce waste. However, those stories are generally anecdotal in nature.

Accenture set out to “uncover the reality behind the buzz” by talking to 85 of the world’s largest companies that have gone zero-based.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Only two of those companies initiated zero-based budgeting (ZBB) before 2011. “Understanding and momentum started building” between then and 2013. And from 2014 through 2017, the proportion of the surveyed companies that adopted ZBB increased by an average of 57% per year.

As to monetary results, the companies reported, on average, a 15% cumulative annual cost reduction during their ZBB project implementation period (typically about 2.5 years), compared with a baseline (usually, spending in the previous year). That translated to average bottom-line savings of more than $260 million. They most often redirected the savings into growth initiatives (52%), digital technologies (31%), and the bottom line (15%).

The companies pursued ZBB for different reasons: 96% of the survey participants got started to improve profitability; 48% were influenced by competition; and 40% cited slow growth as a catalyst.

However, there were two surprises in the responses to that question, according to Accenture. First, only 14% said M&A was a driver. “That flies in the face of common, but flawed, wisdom that says companies typically pursue ZBB in crisis mode in an M&A scenario to improve integration, speed results, and realize the integration business case.”

The second surprise: “The media is fixated on the pressure coming from private equity funds and activist investors to implement programs like ZBB. But only 8 percent of companies say this was a factor for [them].”

No two ZBB programs look exactly alike, the authors write, but there are trends in how companies implement them.

The surveyed companies don’t necessarily apply ZBB across the full range of budgeting scenarios, although 92% of them use it for general and administrative expenses. Lower proportions of the companies apply it to sales and marketing (52%), direct and indirect labor (43%), and logistics and cost of goods sold (42%).

Geographically speaking, companies tend to apply ZBB on a worldwide basis (45%) more often than on an in-country (37%) or regional (18%) basis. Similarly, more than half (55%) of the surveyed companies apply ZBB corporate-wide, compared with 18% for function-specific and 17% for business-specific application, while 13% employ it in both of the latter two ways.

Companies were about equally split between launching it as a full-throttle rollout (43%) and a staggered rollout (45%), while only 11% started off with a pilot program.

Accenture’s report notes that the hype surrounding ZBB has fueled the idea that it’s a silver bullet for all cost-management woes. “The reality is that, like any major transformation, ZBB is not an easy fix,” the authors write. Companies reported that the hardest obstacles to overcome were cultural buy-in (67%), change management (41%), and data visibility (33%).

“The hardest things to do are also the most important,” the report says. “Culture and change are what make ZBB stick. Unlike traditional techniques that use a cut-the-fat and gain-it-back approach like every fad diet does, ZBB is a lifestyle transformation. It requires big changes in organizational thinking and doing so that the ‘weight’ never comes back.”